With an imminent change in SARB Governors, one has reason to wonder whether the monetary policy emphasis may change, and if so, with what kind of implications for the two most important prices in the economy (interest rates and the rand).

The two terms of Governor Mboweni since 1999 stand out clearly for what they achieved.

The SARB can claim successful regulatory bank oversight, an important explanation why South Africa got through the recent global financial crisis without any major bank problems.

Governor Mboweni's era began with inflation targeting, a new approach strategically imposed by government. This was a major break with the past as the SARB started to conduct a new monetary policy (philosophy).

There was a distinct break with Governor Mboweni's predecessors, where Governor Stals's policy could be described as exchange rate anchoring and his predecessor, Governor De Kock, as money supply anchoring.

Rates were treated as a stability anchor

Under Governor Mboweni interest rates were treated as a stability anchor for the economy, kept mostly appropriately positive in real terms, with the primary aim of containing inflation expectations and achieving over time a CPIX or CPI inflation reality within a stated target of 3 percent-6 percent as decreed by government.

External shocks at times deflected inflation from its intended target range, but their passing and vigilant policy application succeeded mostly in returning CPI to its target range over time.

As regards the currency, a totally different approach prevailed under Governor Mboweni, best described as ‘hands-off’ after the disaster of the late 1990s when the limits of managing the exchange rate were driven home rather painfully at the time of the Asian Contagion Crisis.

Though the SARB did buy surplus foreign exchange on a large scale during 1999-2009, working off the oversold forward book of $25-billion and eventually building up a net foreign reserve of $35-billionn, such purchases were mostly not actively intended to target the rand.

Still, net purchases tended to occur when the rand was firming under the influence of surplus capital inflows and the pace of reserve accumulation tended to slow down during periods of rand sell-offs.

Chronically dollar-short

Such judicious interventions and the favourable external conditions prevailing during most of this decade allowed the external reserve position to be fundamentally transformed from being chronically Dollar-short at the end of the Apartheid era to the comfortable external financial position the country enjoys today.

Things did not always work out, though.

Especially the 2001 currency episode, like its 1998 predecessor, can be partly attributed to SARB action choices. One thinks of continuing foreign reserve accumulation and interest rate easing after the international tide in foreign currency markets had turned against the rand, as well as the verbal interventions of the period, apparently contributing to some big international players for a while refusing to make a market in rand, greatly worsening the currency’s instability.

One can also point to cyclical turning points where monetary policy wasn’t always equally fast in changing direction. For instance continuing too long with rate easing in 2001, continuing too long with rate tightening in 2002, probably easing rates too far in 2003-2004, starting too late with rate easing in 2008 (and probably not vigorous enough right away).

However, it must be admitted that hindsight is a perfect science, and that at all these turning points it wasn’t always equally easy to discern what was the appropriate policy stance in a rapidly changing world. Under the circumstances, these possible policy over- and undershoots were mostly mild and rapidly corrected through subsequent actions.

Read more on page 2...